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Is Verizon Stock a Buy After First-Quarter Earnings?
Verizon (NYSE: VZ) just reported its earnings for the first quarter of 2025. The telecom company improved its revenue and profits, but not at levels that impressed investors. With that, the stock fell amid higher-than-expected cancellations.
Nonetheless, Verizon's long-term problems are likely the issue weighing on its stock performance. Until the company addresses those, the telecom stock is likely to struggle. Here's why.
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Verizon's Q1 earnings
At first glance, Verizon delivered a stock performance that was consistent and typical for a mature company such as this. The $33.5 billion it earned in revenue was 1.5% higher than the year-ago level.
Also, Verizon held the line on operating expense growth, limiting it to 0.2%. Despite lower income from other sources and higher income tax expenses, Verizon delivered just under $5 billion in quarterly net income, a 5.5% increase from the same quarter in 2023.
Moreover, what was probably the most impressive number was free cash flow, which climbed to $3.6 billion in Q1, up from $2.7 billion in the same quarter last year. Verizon has just under $2.9 billion in quarterly dividend expenses, which should presumably reassure income investors concerned about the safety of its payout.
Still, investors focused more on subscriber numbers, which pointed to some struggle. The company lost 289,000 subscribers last quarter, well above the 197,000 that analysts had expected.
This is notable, as Verizon is a domestic business and, thus, does not face any direct threats from tariffs, though struggling consumers may look for lower-cost plans as a way to deal with rising costs.
Ongoing challenges
However, the concerns about Verizon stock seem to be more subtle but well-known. One issue is the ongoing strains of market competition. The need to avoid falling behind AT&T and T-Mobile forces it to invest heavily in maintaining and upgrading its network.
To this end, it spent $4.1 billion on capital expenditures in Q1. The company subtracts that expenditure from free cash flow, and indeed, its competitors have to make similar expenditures.
Nonetheless, it weighs on a company that has to service $143.6 billion in total debt. That's a tremendous burden on the balance sheet, considering the $102 billion in total equity.
Additionally, that debt fell by only $365 million during the quarter, resulting in $1.6 billion in interest costs over the same period. That rightly leaves investors questioning whether the company should cut the dividend to apply some of the $2.9 billion it spends quarterly on payouts to debt reduction.
Verizon currently offers a yearly payout of $2.71 per share, a dividend yield of 6.4%. That's more than quadruple the S&P 500's yield of just under 1.5%.
Furthermore, that dividend looks increasingly like a trap. Verizon has had the worst-performing stock among the three major telcos, meaning shareholders seem to own it for its payout. Since the dividend has risen for 18 consecutive years, the annual payout hikes likely contribute to its popularity as an income stock.
VZ Total Return Level data by YCharts.
Investors should also remember that AT&T walked away from a 35-year track record of payout hikes when its financial troubles forced it to cut its dividend. While the stock dropped for two years after its dividend cut, it has experienced a resurgence since mid-2023. That could make Verizon's management reconsider its dividend stance.
Moving forward with Verizon stock
Despite a mixed Q1 report, long-term issues remain the biggest challenge for Verizon stock. Indeed, Verizon stock is up by nearly 35% since bottoming in late 2023. Additionally, at a price-to-earnings (P/E) ratio of 10, it looks like a bargain.
Unfortunately, the 6.4% dividend yield that makes Verizon attractive to income investors could also be a target as the company looks for ways to reduce its massive total debt. Moreover, it is unclear whether a low P/E ratio would limit the downside of this stock if it were to trim its payout.
Hence, while the latest earnings report points to business as usual, investors should focus more on the company's longer-term problems and base their investment decisions on those.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.